Bloomberg News

Felon Forecaster Blogs on Cycles After 11 Years in Prison

September 28, 2011

(Adds Armstrong’s legal claims in 24th paragraph.)

Sept. 28 (Bloomberg) -- Martin Armstrong is a self-taught economist who is starting to build an Internet following from an almost-empty office across the street from Philadelphia City Hall. He’s also an unrepentant felon who spent 11 years in prison for cheating investors out of $700 million and hiding $15 million in assets from regulators.

In Armstrong’s view of the world, where boom-bust cycles occur like clockwork every 8.6 years, what matters is his record as a forecaster, not as a criminal. He called Russia’s financial collapse in 1998, using a model that also pointed to a peak just before the Japanese stock market crashed in 1989. These days, as the European sovereign-debt crisis roils markets worldwide, he reminds readers of his October 1997 prediction that the creation of the euro “will merely transform currency speculation into bond speculation,” leading to the system’s eventual collapse.

“The stuff I wrote about in ‘97 is all coming true,’’ he said in an interview, the first since being released from jail in March. Armstrong says on a website on which he writes that his 1999 indictment stemmed from ‘‘wild and unfounded allegations related to his business in Japan.’’

That’s not the view of prosecutors, who said he ran one of the largest Ponzi schemes in history, or of three federal judges, who called him a con artist or cheat. Economists dismiss his cycle theory.

‘‘His 8.6-year cycle perhaps roughly fits the timing of the last three U.S. recessions but that’s about it,” said Karel Mertens, a professor of economics at Cornell University in Ithaca, New York, who has studied business cycles. “It’s comparable to numerology.”

Web Commentaries

Armstrong, 61, isn’t deterred by the criticism. After banging out commentaries on a typewriter in his cell, he’s now publishing online and attracting readers interested in his research on capital flows and currency debasement spanning centuries.

He provided a report from Google Analytics showing that the economics projection page of martinarmstrong.org got more than 200,000 views last month. Google Inc., which provides the reports only to website owners, declined to verify the numbers.

“He’s a genius,” said Michael Krieger, a former commodities analyst at Sanford C. Bernstein & Co. in New York who now manages his own money. “He would have a line of people all over the world willing to pay a lot of money to work with him.”

Occasional Reader Rogers

Jim Rogers, a commodities investor and chairman of Singapore-based Rogers Holdings, said he reads Armstrong occasionally for his “historical knowledge and insight,” though he doesn’t pay attention to his cycle theories.

“You can be the most brilliant tactical trader, but if you don’t understand the big picture, it’s the noise before the big crash,” said Simon Mikhailovich, co-founder of Eidesis Capital LLC, a New York-based firm that invests in distressed assets. “That’s why people read Armstrong.”

Armstrong’s rap sheet may hinder his efforts to find paying clients for his global economics advice. Three traders who read his reports and asked not to be named said their current employers wouldn’t want to be associated with a convicted felon no matter how useful his theories.

A New Jersey native who didn’t graduate from college, Armstrong said he built a theory of “confidence cycles” when he discovered in the 1970s that financial panics from 1683 to 1907 were separated by 3,141 days on average. He later realized that number was equal to 1,000 times pi, whose value is the ratio of any circle’s circumference to its diameter.

Rome to 1930s

By the late 1990s, Armstrong was running his firm, Princeton Economics International Ltd., out of an antiquities- filled office overlooking Tokyo’s Imperial Palace where, he said, he used charts of financial panics from ancient Rome to the Great Depression to trade metals, stocks and currencies.

“He was pretty highly regarded,” said Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “His cycle analysis was pretty closely followed around the world.”

In 1999, U.S. prosecutors accused Armstrong of cheating Japanese corporate investors by hiding losses. Regulators also sued him and his Princeton, New Jersey-based firm for fraud. A judge later jailed him for contempt after he refused to surrender 102 gold bars, 699 gold coins, rare coins, an ancient bust of Julius Caesar and a computer once stored in his home.

His failure to surrender the assets, which he said he’d given away, led to the longest jailing ever for civil contempt in a federal white-collar case. Armstrong spent seven years in a Manhattan prison that houses drug dealers and terrorists, surviving an attack that left him hospitalized.

Guilty Plea

Armstrong pleaded guilty in 2006 to conspiracy for lying to investors about his trading record and the value of assets he held, and spent five more years in a New Jersey prison camp before being released to his home on March 8. Republic Securities, now a unit of HSBC Holdings Plc, also pleaded guilty, admitting it helped Armstrong swindle clients. It paid $569 million in restitution. Two ex-Republic employees and a former Armstrong worker pleaded guilty as well.

Tancred Schiavoni, a partner at law firm O’Melveny & Myers LLP who was the court-appointed receiver for Armstrong’s firm, said he believes Armstrong kept the gold.

“He would love to hold a press conference in Switzerland with you taking a picture of him having just dug up the gold bars and thumbing his nose at the whole world,” Schiavoni said.

Dollar Collapse Seen

Armstrong said his study of Greek currency debasement shows the U.S. dollar is headed for collapse, while his model of confidence cycles suggests that the debt crisis will worsen over the next 4.3 years.

“The play never changes,” said Armstrong, now goateed and 15 pounds heavier than when he was jailed. “The actors do.”

Armstrong lives with family in southern New Jersey. Still on probation, he said he’s doing legal research for lawyers, fielding book proposals, readying a seminar, weighing a consulting offer from a European government and planning to meet with U.S. Congressional officials. He won’t identify the lawyers, officials or foreign government so as not to “drag them” into his case. His seminar, scheduled for early December, has more than 150 registrants, he said. Filmmaker Marcus Vetter said shooting of a documentary on Armstrong will begin in November.

“I’ve got some interesting offers from different overseas operators,” Armstrong said. “Money is one of the least things I’ve been worried about.”

‘Don’t Owe Anything’

Armstrong says he hopes to someday overturn his conviction and is now seeking to reverse an order by the U.S. Securities and Exchange Commission barring him from the securities industry. The government forced him to plead guilty, he says, by jailing him for so long on civil contempt charges, and that the U.S. Supreme Court has blocked regulators from suing over overseas conduct. He says can’t be liable for fraud or running a Ponzi scheme because he wasn’t acting as a money manager.

Judith Burns, an SEC spokeswoman in Washington, and Carly Sullivan, a spokeswoman for U.S. Attorney Preet Bharara in New York, declined to comment.

Gold cost $285 per ounce on Jan. 14, 2000, when Armstrong was jailed, and $1,652.50 yesterday. Armstrong shook his head when asked if he has the missing bullion.

Besides, he said, it doesn’t matter if he did have the treasure because his investors have recovered their losses from Republic and Princeton’s receiver. Investors recovered a “significant” amount of their out-of-pocket expenses, the receiver said in court papers.

“I don’t owe anything,” Armstrong said. “Even if they were mine, I could do anything I wanted with them.”

--Editors: Larry Edelman, Christian Baumgaertel

To contact the reporters on this story: Zeke Faux in New York at zfaux@bloomberg.net; David Glovin in New York at dglovin@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.


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